A report has found that 2.5million children live in households struggling with debt, and that they face bullying, family breakups and poor performance in school as a result

Children in households trapped by Britain’s debt culture suffer worry, bullying, and shortages of food, clothing and heating, an influential children’s charity said yesterday.

Two and a half million live in families which are behind with loan repayments and around one in five of all families with children cannot cope with their debt.

The effects of debt mean strain on the families - often leading to break-up - and poor performance of children at school, the Children’s Society said.

Its report called for the Government to negotiate a debt holiday for families to help parents escape the pressure to meet repayment and interest demands, the Children’s Society said.

Debt relief for parents would mean that desperately-pressed families with children would not have to pay back loan instalments and would be freed from default charges, escalating interest or enforcement action, its report proposed.

The Church of England charity also called for councils to go easy on collecting council tax arrears from families, and for new laws to make it harder to evict parents with children who fail to pay their rent.

A radical overhaul of credit law to help families is needed to help children afflicted by worry, bullying and shortages because of the pressure on their parents to repay loans, the Children’s Society said.

Its chief executive Matthew Reed said: ‘Families are increasingly relying on debt as a way to make ends meet - but we are in danger of ignoring the impact this is having on children now and in the future.

‘We cannot allow children to pay the price of debt.’

He added action must be taken ‘to challenge an advertising culture that sells high cost credit as an easy solution that, in reality, often make financial problems worse.’

The recommendations, which were backed by the Archbishop of York, the Most Reverend John Sentamu, follow pledges last year from the Archbishop of Canterbury, the Most Reverent Justin Welby, to put Wonga.com and other payday lenders out of business by encouraging the spread of Church-sponsored credit unions.

The report backs proposals to curtail high interest payday lending which were put forward last year by the likes of Justin Welby (left), Archbishop of Canterbury, and Dr John Sentamu (right), Archbishop of York

But critics warned that giving debt relief to families with children would only make it more difficult for those in trouble to get help from commercial lenders.

Ruth Lea, economic adviser at the Arbuthnot Banking Group, which has a consumer lending arm, said: ‘If these terms were enforced parents would find it harder and harder to get credit.

'They would find nobody would lend to them, or loans would become very expensive.

‘The effect would be to force people who need loans into the hands of loan sharks.’

The Children’s Society report comes at a time of deepening concern over the number of individuals and families falling into crippling debt and the increasing prominence and popularity of payday lenders, whose credit is heavily advertised and instantly available, but which carries punishing interest rates for those who fail to repay on time.

It said that two and a half million children live in families with ‘problem debt’, where parents are behind with at least one major bill. Another five million live in families struggling to keep up with repayments, the Society said.

A survey of 2,000 homes with children found nearly one in five at the problem debt level of borrowing, the report said, with each one owing on average £3,437.

More than half of children in such families worry about their parents’ money difficulties, and nearly half say debt problems cause arguments and strain in the family, the charity said.

Report author the Children's Society, said an overhaul of credit law is needed to help struggling families

Around seven per cent of the adults it spoke to said debt had caused a relationship with a partner to break.

Children in debt-ridden families go without food, clothing or heating, they are twice as likely as others to be bullied at school, and they are vulnerable to mental health problems, according to the report.

The charity said the Government should ‘develop a breathing space scheme giving struggling families an extended period of protection from default charges, mounting interest, collections and enforcement action.’

Other legal protections should make it difficult to evict debtors from privately-rented homes, and schools shuld teach children about the realities of debt, the report said.

Archbishop of York Dr Sentamu said: ‘When the monthly struggle to pay the bills becomes too much, often families think they have no option but to borrow money to provide the basics for their children.

'We need to make sure families living in poverty have somewhere to turn other than to usury-lenders.’

But Miss Lea said: ‘There are many people who look for short-term loans, for reason such as needing to maintain a car. They get the loan and they pay it off.

'But if people don’t need to pay it off, they will find it harder and harder to get short-term credit, and they will then turn to sharks.’